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Disinflation in core ECI continues apace

Published on January 31, 2025

Gerard MacDonell

Source: Federal Reserve Banks of Atlanta and St. Louis (FRED)
Data are monthly but expressed here at a quarterly frequency. All data are to December, represented as Q4.

As Larry Summers likes to say, mixing a metaphor, the wage data come in three levels of quality: Bronze, Silver and Gold Standard. Average hourly earnings (AHE) are bronze; the Atlanta Fed Wage Tracker is Silver; and the ECI is gold standard.

After controlling for mix shift, I read the AHE data in December (on the day) as marginally firm. The slightly more reliable Wage Tracker suggested that strength might have been about mix shift that I could not control for on the day the AHE data printed. And then this morning’s ECI suggested more convincingly that wages were benign in December.

Before seasonal adjustment, wage and salary compensation excluding variable compensation was up 53 basis points (as I calculate it, rather than reading from the table). Q4 is seasonally weak, and those figures are NSA, so it is best to monitor the 4-quarter change, which continues to decelerate, roughly as flagged by the wage tracker, as indicated in the right panel of the chart above.

This provides a benign signal on one of the ambiguities in the US inflation outlook. Is the labor market running slightly ahead of, at, or slightly below full employment. I pick slightly ahead of, because of the gap between the employment population ratio and its potential value implied by the NAIRU and potential labor force participation rate. But the wage data themselves now look actually to be against me on that point, and it is not just about that second derivative I disparage. Wage growth is now actually moderate! And the news this morning is on the wages themselves, not to imply this was a shocker, as the headline data were at the screen consensus.

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